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Weinstein: Amazon Will Cease to Amaze

NEW YORK (
TheStreet) -- For
Amazon(AMZN - Get Report) investors, the run higher has been nothing short of a storybook romance.

So far, Amazon shares have encountered only small bumps on the way. It's easy to see why so many investors have fallen under the spell that valuations don't apply with Amazon. Even after
Apple (AAPL) and
Barnes & Noble (BKS) created real competition for Amazon's Kindle, shares in Amazon continued climbing.

Microsoft (MSFT - Get Report) and
Google (GOOG) are offering cloud services with prices falling so fast it could make the smiley face at
Wal-Mart (WMT) blush with envy. The writing has been on the wall for some time that cloud services may become a significant cash flow burden for Amazon.

How can anyone believe Amazon's cloud services will be anything other than a race to the bottom of profitability when Microsoft and Google are stepping up aggressiveness and lowering prices to take away market share from Amazon?

Rackspace Hosting's (RAX) stock chart isn't trending from the top left to the bottom right because investors believe margins and profitability are expanding as the space expands.

Clearly, Rackspace is more vulnerable to competition in cloud computing compared with Amazon; however, reduced vulnerability isn't tantamount to invincibility, even if Amazon has been treated like royalty in the past.

Investors should pay close attention to revenue, income and margins. If Apple's investors are justified in their disquiet for margins, Amazon's investors should be in full blown consternation.

Amazon's permabulls maintain that the company is building the infrastructure needed to increase profitability. That may be true; I buy into the argument right up to the point of profitability, at least on a per share basis. Sure overall profits may increase slightly, but will that actually be enough to make Amazon a good investment? I think not.

Amazon continues to allocate greater and greater amounts of money for relatively small gains in profit. It's not an altogether failing strategy, after all it has effectively kept investors optimistic to the point of driving up the forward P/E ratio to triple digits. At some point, the scale of operations becomes so gigantic that a meaningful increase in revenue is no longer a viable option.

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